The Economics of Software

Software is like nothing else in the history of human endeavor:1 unlike everything else we have ever built, software costs nothing to manufacture, and it never wears out. Yet these magical properties are arguably overshadowed by the ugly truth that software remains incredibly expensive to build. This gives rise to some strange economic properties: software’s fixed costs are high (very high — too high), but its variable costs are zero. As strange as they are, these economic properties aren’t actually unique to software; they are also true (to varying degree) of the products that we have traditionally called “intellectual property.” But unlike books or paintings or movies, software is predominantly an industrial good — it is almost always used as a component in a larger, engineered system. When you take these together — software’s role as an industrial good, coupled with its high fixed costs and zero variable costs — you get all sorts of strange economic phenomena. For example, doesn’t it strike you as odd that your operating system is essentially free, but your database is still costing you forty grand per CPU? Is a database infinitely more difficult to write than an operating system? (Answer: no.) If not, why the enormous pricing discrepancy?

To come back to our initial question: why is the OS basically free while the database is costing you forty grand per CPU? The short answer is that the changes that have swept through the enterprise OS market are still ongoing in the database market. Yes, there have been traditional demand-side efforts like MySQL and research efforts like PostgreSQL, but neither of these “good enough” efforts has actually been good enough to compete with Informix, Oracle, DB/2 or Sybase in the enterprise market. In the last few years, however, we have seen serious supply-side movement, with MaxDB from SAP and Ingres from CA both becoming open source. Will either of these be able to start taking serious business away from Oracle and IBM? That is, will they be enough to lower the FYO point such that more customers say “FY, O”? The economics of software tells us that, in the long run, this is likely the case: either the demand-side will ultimately force sufficient improvements to the existing open source databases, or the supply-side will force the open sourcing of one of the viable competitors. And that software does not wear out and costs nothing to manufacture assures us that the open source databases will survive to stalk their competitors into the long run. Will this happen anytime soon? As Keynes famously pointed out, “in the long run, we are all dead” — so don’t count on any less sighing or groaning or check writing in the immediate future…